FATF: Combating Money Laundering, Terrorism Financing, and the Threat of Nuclear Weapons

The Financial Action Task Force (FATF) plays a critical role in safeguarding the global financial system. Established in 1989, this intergovernmental organization sets international standards for combating money laundering, terrorist financing, and the proliferation of weapons of mass destruction (WMDs). Over 200 countries and jurisdictions have committed to implementing these standards.

Originally focused on curbing drug money laundering, FATF's mandate has expanded significantly. The organization broadened its scope in 1996 and again in 2001 to address terrorist financing. In 2008, proliferation financing, specifically funding for WMDs, was incorporated into its core mission.

With the ongoing Russia-Ukraine conflict, concerns about nuclear weapons use have reached a dangerous high. Given the vast arsenals of the US and Russia, international efforts to prevent proliferation are more crucial than ever.

FATF defines proliferation financing as any act that provides financial support for the development, acquisition, or use of nuclear, chemical, or biological weapons, or their delivery systems. This includes activities that violate national or international laws.

In April 2024, FATF member states reaffirmed their commitment to combating proliferation financing. This commitment includes:

• Increased funding for relevant activities

• Assisting countries in strengthening their anti-proliferation financing regimes

• Implementing effective standards to regulate virtual assets and prevent their use in proliferation financing

• Providing a comprehensive update on terrorist financing methods and trends

• Integrating anti-proliferation financing principles into Central Bank Digital Currencies (CBDCs)

The FATF "grey list" identifies countries with weaknesses in their anti-money laundering, counter-terrorism financing, or anti-proliferation financing regimes. Being on the grey list can have significant consequences, including:

• Reduced capital inflows

• Lower GDP

• Reputational damage

• Increased transaction costs and processing times

A 2021 IMF study found that countries on the grey list experience an average 7.6% decline in GDP due to these factors. The grey list serves as a powerful deterrent, discouraging nations from becoming havens for illicit financial activities.

FATF works with a network of nine FATF-Style Regional Bodies (FSRBs) to achieve global implementation of its recommendations. These regional bodies play a vital role in promoting effective implementation and providing expertise in FATF policy making. For instance, MONEYVAL, the Council of Europe's FSRB, assesses compliance with anti-money laundering and counter-terrorism financing standards.

FATF's guidance on suspicious transaction reporting proved instrumental in uncovering financial flows supporting Pakistan's nuclear program through the Khan network. FATF's country-based approach, with continuous monitoring and improvement recommendations, remains central to achieving a world free from WMD proliferation.

(Views are personal and do not represent those of the Government of India)

Author: Subhash Jangala, Indian Revenue Service Officer

Source: Financial Express, May 11, 2024